Kriston Capps asks a simple question and gets a lot of answers. Allow me to throw in my two cents, because I think most of the criticisms of the fair tax mostly miss the point.
I am in fact against the Fair Tax, and not only because (as it is) the thing is regressive-ish. But the liberal half of the blogosphere has made its claims too strong. The thing is not a poor-killing holocaust of massive proportions; and it is also not quite as economically implausible as they are claiming.
Most of the critics are hanging their criticism on the fact that the poor spend a higher proportion of their income than the wealthy. My answer to this is yes, and why should we care? Few of the wealthy are Scrooges who gain massive positive utility merely from staring at their stock certificates. Most of them, like most of the rest of us, enjoy their wealth only when they spend it on some form of consumption. And when they do that, they pay the same tax as the rest of us. Until they spend it on consumption goods, they are giving it to the rest of us to make our economy more productive. In this dimension, the tax is flat--actually very slightly progressive, because the "prebate" is a smaller share of their consumption than it is for someone in a low-paying job.
I am aware that one can argue that savings are actually a consumption good, first because massive accumulations of capital confer power (Bob Rubin gets his phone calls returned by famous people), and second because the security they offer is in itself a positive good. I find this unconvincing. There are very few people who have enough wealth to do the first kind of consumption, and almost every one of them gets much more clout from, say, being the president of GM, than they do from being rich. And the second form of consumption gets taxed as soon as you actually realize it, so I can't worry about it excessively.
There are, however, two important senses in which the tax is regressive. The first is that it moves us from a more progressive system: in the future, the poor would bear a heavier share of the total tax burden than they do now. (Forgive me if I suspect that for many of its boosters, this is a feature rather than a bug). I don't feel like the poor are such extravagent free riders that this should be a priority of tax reform.
And the second is that while the tax may be flat as regards consumption, it is steeply regressive as regards utility. While I think that the tax system should be structured so that the poor have a stake in spending decisions--so that new government spending requires sacrifice from them as well as from more affluent citizens--it seems morally obvious to me that they should pay a lower share of their income to the government than the wealthy should. Consider how much a low wage worker gives up when she hands over 23% of her paltry income--and then compare it to how much Warren Buffett sacrifices when he hands over the same 23%. Though his 23% is several orders of magnitude larger than hers, the net drop in his utility is many times lower. I find it ludicrous that anyone would even contemplate structuring a tax system that way.
These problems could actually be mostly allayed by playing with the prebate--if you make it large enough, the thing is progressive to any level any liberal of my acquaintance would like to target. But that runs into political problems. Which highlights the biggest problem, to my mind, with the fair tax. The tax's main virtue is its simplicity--it is a backdoor way to accomplish bipartisan goals like tax simplification. But that simplicity would never survive the political process. The prebate would be set too low to be progressive, or too high to raise much revenue; vast swathes of goods would end up exempted (medical supplies! new homes! baby products!); and the compliance process would get progressively more complicated in order to catch evaders. In the end, everyone except Steve Forbes would be begging for the return of the income tax.
What does the Fair Tax say to the guy who saved a $1mm in mutual funds, paying income and capital gains taxs all the way, who retires and wants to spend it? Does he get hit with 23% tax? At least, under our current system, he can spend assets with only state sales tax to worry about.
what does "from each, according to his ability pay" (progressive taxation) have to do with:
"We hold these truths to be self-evident:
That all men are created equal; that they are endowed by their Creator with certain unalienable rights; that among these are life, liberty, and the pursuit of happiness; that, to secure these rights, governments are instituted among men, deriving their just powers from the consent of the governed; that whenever any form of government becomes destructive of these ends, it is the right of the people to alter or to abolish it, and to institute new government, laying its foundation on such principles, and organizing its powers in such form, as to them shall seem most likely to effect their safety and happiness." (?)
If one has guilt to assuage, deal with it, don't socialize it..
"...it seems morally obvious to me that they should pay a lower share of their income to the government than the wealthy should.Consider how much a low wage worker gives up when she hands over 23% of her paltry income--and then compare it to how much Warren Buffett sacrifices when he hands over the same 23%. Though his 23% is several orders of magnitude larger than hers, the net drop in his utility is many times lower. I find it ludicrous that anyone would even contemplate structuring a tax system that way."
This is why people who consider Ms. McArdle a libertarian are badly mistaken. Here she waxes enthusiastic about heavily progressive taxation and in her Atlantic Monthly article she pushes for tax increases.
It is far from "morally obvious" that the flat tax or the fair tax is wrong. Progressive taxation causes distortions that stunt growth. That lower growth will cause more proverty in the long run. Thus, those who push for progressive taxation are hurting the poor, not helping them.
As economist William Easterly observed:
It is beyond me why we can't just move to a flat tax on income with a large personal exemption. I am tired of the social engineering that goes along with any plan outside of the straight flat tax. The fair tax seems to me to be nearly as bad as what we have now.
I'd love to have people poke holes into the following tax proposal:
Everyone gets an exemption on the first $30K of earnings. We set a flat percentage for everything above that. No other exemptions period. I do my taxes on a postcard.
The biggest problem with payroll taxes is that they increase the cost of labor.
The higher the tax, the more it changes behavior. At some point avoidance turns into evasion. Taxes on goods provoke smuggling. Taxes on labor promote an underground labor economy.
The main objection to illegal immigrants is their unfair price advantage over citizens. An illegal immigrant can live in the cash economy much more easily than a citizen.
The assertion that illegal immigrants pay payroll taxes is false. States that rely on payroll taxes find illegal immigrants a bigger drain on the budget than those that do not. Compare California with Texas.
Didn't Russia's implementation of a flat tax actually decrease tax avoidance and "cheating" though?
k9
Totally, on both posts.
E. Europe has many states that have migrated to Flat Tax regimes, their subsequent economic growth should a lesson for us..
Our greatest Trade Deficit has been Exporting Capitalism and Importing Socialism..
Megan, it seems to me the moral argument regarding a progressive tax for Mr. Buffett is not the marginal decrease in his well-being. The question is whether those $$ would do more good in Mr. Buffett's hands vs the government's.
A perfectly efficient gov't can only redistribute wealth, and govts on this planet destroy a good portion of that which they touch.
If that money were to remain in the private sector, especially in the hands of a person with a history of creating wealth for himself and thousands of others -- well, you see where I am going. Seems to me that priority #1 in alleviating poverty is to create wealth.
Megan:
It seems morally obvious to me that they should pay a lower share of their income to the government than the wealthy should.
It doesn't seem morally obvious to me that taxes should be related to income at all. We don't force the rich to pay orders of magnitude more for goods than the poor do; why should they pay orders of magnitude more for government?
An income or consumption tax may be justified on pragmatic grounds--it's hard to raise much money with a head tax (though personally I consider that more feature than bug)--but the only truly fair tax would be one based on the cost of providing government services to the taxpayer in question. I suppose you could make an argument that this is related logarithmically to income, but certainly not linearly.
"the only truly fair tax would be one based on the cost of providing government services to the taxpayer in question"
Besides being impractical and impossible to administer I think this ignores the good that comes to you through government programs that you do not ever have any interaction with. Suppose an afterschool program is funded by taxes and said program keeps a teenager from robbing your house. You have benefited from this program that you have never interacted with and potentially never even knew existed.
Back to my proposal... I realized I have errored in my thought. I wouldn't even need to file a return as my % income over $30K would automatically be deducted. EVEN BETTER!
So if the major argument is that the simplicity of the Fair Tax would be legislated away isn't this essentially a statement that no new system can or should be enacted because "they'll screw it up anyway"? Why would a flat tax be any more difficult for the government to complicate?
Either the government enacts a system without loopholes or it doesn't. Why is the Fair Tax any more susceptible to this jiggery-pokery than any other schema?
"Though his 23% is several orders of magnitude larger than hers, the net drop in his utility is many times lower. I find it ludicrous that anyone would even contemplate structuring a tax system that way."
By the way, interpersonal utility comparisons are highly dubious. As Greg Mankiw puts it:
But Megan's argument depends on such a comparison, and therefore has no real grounding in economics. One might even call her argument "ludicrous," though I would never be so harsh.
Even "the world's tallest female econblogger" can make the odd mistake.
How could you say that the wealthy only enjoy their money when they spend it. I'm nearly wealthy and I enjoy my wealth when I invest it. I have got to the point where my invested funds earn an income equal to the income I work for.
Each dollar I save and invest is like an employee who goes to work in my place and turns over his entire paycheck to me. A few more years of saving and investing and I can consume all my time at leasure activities, my children, travel and hobbies. Someone who can only save $20K a year is far from earning significant ammounts from investments.
Buffett does not consume any significant part of his wealth, he puts it to work. So taxing the wealthy four times as much as the nonwealthy does not reduces a lot of luxury consumption, it reduces a lot of productive investment.
A consuymption tax is good because it soes not tax money saved and invested.
Either the government enacts a system without loopholes or it doesn't. Why is the Fair Tax any more susceptible to this jiggery-pokery than any other schema?
The main issue with the Fair Tax is the monthly prebate that needs to be calculated on the size of your family to replace the exemption for standard living expenses. This prebate to me is easily meddled with by the government.
Another issue is what specific commodities the Fair Tax will apply to when implemented. Food? Cars? Houses? A 23% increase to the price of a house is huge. To me this is another area for "jiggery-pokery" (as good a term as any).
The final Fair Tax issue (in my mind, I'm sure there are others) is how it would impact retired or nearly retired persons who saved their whole life paying income tax with a plan to spend their money in a (generally) tax free environment. How would this be legislated?
The Flat Tax is more resistant to government fiddling in my mind. You set the exemption at a fairly high rate ($30K in my example) and then index it to inflation. You set your percentage tax rate for the income over the exemption then leave it alone. Finally, you hopefully create a budget to live within the tax revenues you created.
I'd love to hear any criticism of the Flat Tax as I'd like to hone my arguments (and perhaps change my mind).
I have yet to meet a rich US citizen who does not possess a "trust".
I have yet to meet a rich US citizen who does not possess a "trust".
Not sure of your point exactly but I'd guess it is that the already rich will not pay taxes under a Flat Tax system since they have a "trust" from their family. In my opinion the counterpoint to this argument is that at some point in the past they had an ancestor that already paid the tax for that income. The Flat Tax cannot touch these people and in my opinion it shouldn't, they've paid their due.
High earners benefit most from the legal code and public infrastructure. An educated workforce staffs their factories and offices, generating their profits. Public highways take their goods to market. Rule of law provides them security in their profits.
Why not proportional taxes, you ask? When you earn $20k, you work for the money. When you earn $200k, the money works for you -- not only are you using the public goods more (which would justify a flat tax), you're profiting from them. When the benefits are nonlinear, the taxes should be as well.
Why not proportional taxes, you ask? When you earn $20k, you work for the money. When you earn $200k, the money works for you -- not only are you using the public goods more (which would justify a flat tax), you're profiting from them. When the benefits are nonlinear, the taxes should be as well.
I'm not sure I follow you exactly as a flat tax would be linear after the exemption. I agree that rich should pay more in actual dollars but the percentage would be linear.
As an aside... I'd be careful about saying that at $200K the money works for you. I and many of my friends are at and somewhat above that level and it is pretty middle class in some areas of this country (sad as that is).
I've never really understood this claim. Taxable income is completely arbitrary for the truly rich (as opposed to the mere CEO type).
At the risk of sounding political . . .one of the few examples we have is Teresa Heinz Kerry. IIRC, she reported income of around $5 million in 2003. Given the fortune she controls and the market that year, she obviously just recognized a bit for living expenses and let the rest ride. Given that family's policial situation, you have to assume most other rich are even more blatant.
Reading about all the problems that everyone say would occur with the Fairtax makes me wonder if those making the criticism have actually read the Fairtax proposal. It's out in book form and does not take the time to read that you consume trying to understand one paragraph of the present tax code.
The frustration I have with all these discussions is that no one takes the time to read what is proposed before thinking up reasons that it won't work.
There are also a few premises that seem to be accepted as gospel.
1. Rich people must be taxed more heavily in order to atone for the sin of doing well.
2. That the purpose of the tax system is to reward your friends and punish your enemies.
3. Another purpose of the tax system is to force people to act in ways that you want them to.
I also have another problem. The bottom 40% of wage earners now pay effectively no taxes with EIC and deductions. In fact, many actually get more back from the government than they pay in.
Democrats want to shift more of the tax burden onto the upper income earners allowing the Middle Class to pay less in taxes. This will result in a great many voters who can vote themselves funds from the public treasury in the form of programs and have it paid for by others.
What happens to our sense of citizenship if we can vote for whatever we want and never have to pay? Are we still full citizens or do we then become supplicants that depend on the largess of others for our benefit. How does that differ materially from being a beggar or panhandler?
Most of the critics are hanging their criticism on the fact that the poor spend a higher proportion of their income than the wealthy. My answer to this is yes, and why should we care? Few of the wealthy are Scrooges who gain massive positive utility merely from staring at their stock certificates. Most of them, like most of the rest of us, enjoy their wealth only when they spend it on some form of consumption. ... I am aware that one can argue that savings are actually a consumption good, first because massive accumulations of capital confer power (Bob Rubin gets his phone calls returned by famous people), and second because the security they offer is in itself a positive good. I find this unconvincing.
Interesting point. Since the rich gain no utility from the 90% of their wealth which they don't spend, I'm sure they won't mind if we just take it all away. I am slightly curious as to why they went to the trouble to earn it, though.
Or perhaps the idea that the rich gain no utility from the money they don't spend is completely insane.
Maybe... they want to spend it later?
Or maybe...they want to put in a honking great endowment so it can earn interest, thus guaranteeing them and their descendants eternal financial security, as has been the goal of accumulating wealth since forever? Just a thought.
Reading about all the problems that everyone say would occur with the Fairtax makes me wonder if those making the criticism have actually read the Fairtax proposal.
Yes I have, I'd be happy to hear how my criticsm at 10:14 PM was inaccurate.
There are also a few premises that seem to be accepted as gospel.
1. Rich people must be taxed more heavily in order to atone for the sin of doing well.
2. That the purpose of the tax system is to reward your friends and punish your enemies.
3. Another purpose of the tax system is to force people to act in ways that you want them to.
I also have another problem. The bottom 40% of wage earners now pay effectively no taxes with EIC and deductions. In fact, many actually get more back from the government than they pay in.
I thoroughly agree with your assertions that some people see these points as gospel for a tax code. Be careful though because the problem you outline that 40% of wage earners now pay effectively no tax is nothing but a gospel in the other direction.
I'm not sure what to conclude from the fact that no one has attacked my flat tax proposal form earlier.
"I'm not sure what to conclude from the fact that no one has attacked my flat tax proposal form earlier."-k9
It's unassailable. It's a proven pro-Growth formula because of its simplicity, predictability, and genuine Fairness.
Because of such, we won't likely see it..
Peep would do well to get a better understanding of 'Realpolitik'..
There seems to be a misperception in some of the comments above that a 'trust' or 'endowment' escapes taxes.
Charitable Trusts don't pay tax (unless they distribute to a taxable beneficiary in a split-interest arrangement), but the rest of them do. Trusts can be used to sidestep estate taxes to some degree(at substantial cost to the grantor, typically), but they pay income tax on the first dollar at the highest individual rate. If the trust's income is distributed, the beneficiary pays income tax.
TANSTAAFL
And this describes very few of the wealthy I know (which includes at least two billionaires):
Actually, accumulating wealth has become its own end in many cases, and a major philanthropic effort in one's dotage also appears to be highly motivating.
Reading about all the problems that everyone say would occur with the Fairtax makes me wonder if those making the criticism have actually read the Fairtax proposal.
I'll lay out the common critique, although I don't have a dog in the fight.
1. Highly regressive
2. Huge tax cut for the wealthy. In addition, the wealthly, which make a larger portion of their money from stocks/investments, will pay even less tax.
3. Would require a massive cut in federal budget, or a huge increase in the deficit, or both.
Flat taxer seem to tend to support the cut of the federal government - all these points are debatable - certainly the former eastern European countries that have adopted it have seen great results.
Then there is this proposal:
"In 2005, Oregon Sen. Ron Wyden and Illinois Rep. Rahm Emanuel, both Democrats, teamed up to sponsor what they called the "Fair, Flat Tax Act." Among other things, it would condense the 1040 form to a single page and offer just three tax brackets -- 15 percent, 25 percent and 35 percent."
Like I said, I don't have a dog in the fight - I don't feel I understand the issues - so I post this only to learn more. I don't see anyway that this could happen with the current batch of Dems and Republicans in government.
I'd actually prefer to see more discussion on this than on FairTax.
It's unassailable. It's a proven pro-Growth formula because of its simplicity, predictability, and genuine Fairness.
Because of such, we won't likely see it..
That's pretty much what I've concluded. I think the other reason we won't see it is that there are far to many people that have a vested interest in our current system (tax preparers, accountants, software vendors, the entire IRS bureaucracy, people interested in social engineering, etc.). Maybe someday we'll have a candidate that could actually push something like this through.
Also - what happens to the taxes business pay under a flat tax? Do they just go away?
Also - what happens to the taxes business pay under a flat tax? Do they just go away?
In my mind corporate taxes are a seperate issue from personal taxes. I was thinking about that question last night and wondered what effect a similar structure as proposed for personal taxes would have on business.
If a business was taxed at a set percentage of profit with the first $1M exempted then wouldn't that provide a huge incentive to small business and still be fair to everyone? I think it would and you might get a lot of small business lined up behind a proposal... I suspect the KPMG, PriceWaterhouseCooper, Deloitte, etcs of the world wouldn't be so enthusiastic though.
Seems that you have to deal with the business side - it's got to be a huge part of the problem. I'm reading that 40% of people use the 1040ez form to file (of course, the directions for the form are 36 pages long!) - so a flat tax makes it easier to file for the other 60%.
Seems that you have to deal with the business side - it's got to be a huge part of the problem. I'm reading that 40% of people use the 1040ez form to file (of course, the directions for the form are 36 pages long!) - so a flat tax makes it easier to file for the other 60%.
I think you could file on one post card with instructions written in easy to understand terms. I'm not sure what part of the business side you are referring to, corporate taxes or the tax industry that would try to kill a flat/fair tax because it took away their jobs.
Sorry should have been more specific - corporate taxes!
I do think corporate taxes are a huge issue as well. I'm not sure if big business would support sweeping changes in corporate taxes (like the one I proposed above). The cost of tax compliance has to be huge but I wonder how much tax they end up paying after all loopholes are exploited.
k9
The big problem with your flat tax proposal is not the rate, but the definition of taxable income. That is where the complexity in the tax code comes from. If everyone was a salaried employee with one income stream, calculating the tax on one tax rate or five could also be done on a post card. But for a lot of people, it isn't that easy.
Basically, a flat tax rate to "simplify" things is a solution to a non-problem, unless you are also going to simplify the definition of income (eliminated the concept of capital gains as a start, perhaps by declaring all cash and/or property/goods received as income).
Also, contrary to an earlier assertion, most inherited wealth was never taxed. Instead it reflrects long term asset appreciation. Since the assets were acquired cheaply decades ago and never sold, the bulk of the wealth was never taxed.
The big problem with your flat tax proposal is not the rate, but the definition of taxable income.
That's the truth right there. Even a 50-step set of increasing rates is easy to calculate (or just read off of a tax table); flatness doesn't help much. The problem is exemptions and deductions, and the treatment of different sources of income. A "flat tax" solves none of those problems, and those problems could be solved or simplified even keeping the existing marginal rate structure.
Why don't we go to a capital tax? You may bitch and moan about the "unfairness" of anything that causes rich people to have to pay more taxes than poor people, but the fact is--people who have more stuff (and are making more money from passive income) are getting more benefits from the US legal and financial infrastructure. Property Rights aren't free to implement. They require a huge infrastructure to support them. Why shouldn't property owners have to pay proportionally?
The strangest idea I keep running into from the "rich people shouldn't be taxed!" freaks is their assumption that $30K "earned" through dividends (passive income) is somehow more moral that earning the same $30K through the sweat of your brow. My feeling is that unless you have a culture where hard work is seen as "virtuous", you're going to end up with a very split society, where the "good people" laze around at the top and think it vulgar to get their hands dirty with any effort and will do nothing but live off the income from (inherited) invested money, while the peons below work their asses off and have nothing but bitter resentment that they have to spend their days doing nothing but work just to break even. That's the sort of split that causes revolutions, by the way. (My own feeling is that progressive taxes are insurance paid by the rich against getting hanged from lampposts.) You may wail and whine all you want about the Horridness and Injustice of Soaking the Rich, but face it, envy and perceived unfairness have been at the root of a hell of a lot of social unheavals. Anyone who thinks he can shriek "Class Envy!" and somehow magically innoculate himself from the potential effects hasn't read that much history.
(It's also, IMO, one reason why Libertarianism never will really get off the ground. Too many people see it simply as a case of self-justification of "I got mine, and I don't wanna share." Horde enough stuff and refuse to help out your neighbors after an earthquake and You. Will. Get. Lynched, Property Rights be damned.)
The big problem with your flat tax proposal is not the rate, but the definition of taxable income.
I think that is a cop out. Income is income. Dividends, Salary, Tips, etc. is income. Capital gains are not.
Also, contrary to an earlier assertion, most inherited wealth was never taxed. Instead it reflrects long term asset appreciation. Since the assets were acquired cheaply decades ago and never sold, the bulk of the wealth was never taxed.
The income that started the asset that appreciated was taxed as it should be. No tax on capital gains... its not income.
I think that is a cop out. Income is income. Dividends, Salary, Tips, etc. is income. Capital gains are not.
OK. Is the purchase of a specific uniform, required by my employer, deductible, or not? I'm a lawyer, so naturally I need suits and ties: deductible? If the firm buys me a couple of suits, is that income? If I get a company car, is that income? If I drive my own car on company business, can I deduct the gas? If they pay me mileage for driving my own car, is that income? What if I'm a trucker, who owns his own truck, but is paid by the mile for pulling trailers: what fraction of that is income, and what fraction is deductible? What about a cell phone or blackberry your employer buys and pays for: income? Or only income in proportion not the number of personal calls? What if I'm a hotel manager required to live in the hotel: is my room income to me? How about free meals at the hotel restaurant? What about health insurance: income? What about subsidized lunches at the company cafeteria? Free coffee in the break room? Business travel: what if I stay at the Ritz in stead of EconoLodge, is any part of that income?
All of these questions are answered by the current tax code, and all of them (and 1000 more like them) will need to be answered by any income tax code. Complexity can't be swept away easily.
The income that started the asset that appreciated was taxed as it should be. No tax on capital gains... its not income.
That's a great "technical" argument - but would be very difficult to get most Americans on board with that idea. By that measure, Warren Buffet and Mrs. Kerry probably had next to no income, no?
Rob, that is an extensive list and I thank you for it. I do not want to just accept the flat tax as the cure all to our tax issues and you raise a good point.
In answer to some of your points, there are no deductibles so that takes care of part of the question.
Anything given to you by your company as compensation (suits, company car, house) is income.
Your blackberry/cell phone/laptop/etc isn't owned by you so not income.
Health insurance and subsidized lunches is a good question which I'm not sure about... god knows I don't want to get into a health insurance argument like the other thread.
Does the current tax code discuss free coffee in the break room or staying in the econo lodge versus the Ritz?
That's a great "technical" argument - but would be very difficult to get most Americans on board with that idea. By that measure, Warren Buffett and Mrs. Kerry probably had next to no income, no?
I'm not entirely sure of their specific personal situation regarding their enormous wealth (one made through investment and one inherited as I understand it). I suspect Mrs. Kerry probably has dividend income that would be taxed, not sure how Buffett funds his day to day cash flow. He has already said that he's giving away most of his so this would more then make up for any taxes he wouldn't have paid on the way up. Do either of them pay taxes on much income now?
Does the current tax code discuss free coffee in the break room or staying in the econo lodge versus the Ritz?
The coffee in the break room would be a non-taxable "de minimus fringe benefit," and the Ritz would be non-income because you've been sent on the trip at the behest of your employer and they don't poke around into the details (although the corporate tax code, which normally allows full deduction for expenses, would only allow a 50% deduction for travel and entertainment, to curb this sort of thing). On the other hand, if your employer paid for 1 day of business conferences and then 2 more weeks of visiting museums, it would count as income.
Cutting out all deductions will cause some weird behavior for small business and independent contractors. Businesses typically get to deduct all their expenses, and individuals get to deduct those things which are essential to producing income, such as the mandatory uniform (but not the business suits, which I might wear to impress a girl or try to get elected) or gas for a trucker, or scissor sharpening for a hairdresser, etc. Ending the personal deductions will push a lot of those small types into creating corporations or LLCs to preserve their old deductions--which will defeat your goal of a simplified tax code. Indeed, it will make their lives more complicated as they managed two tax returns and two sets of books.
I'm not opposed to tax simplification, mind you, I'm just pointing out that it's not as simple as we might wish it to be.
So what about the corporate tax plan I discussed in conjunction with the personal tax plan? $1M net income exemption then a % of income above the million.
As an aside, I was wondering about your business suit comment as I am required to wear a suit everyday as a consultant and if I could deduct those it would be great! ;-)
So what about the corporate tax plan I discussed in conjunction with the personal tax plan? $1M net income exemption then a % of income above the million.
"Net income" usually means "revenue minus deductions," so that seems like a fine plan to me, but not a simpler one, really, because all the deductions are still there. But eliminating corporate deductions would be a disaster; profits are typically only a few percent of sales, so it would be very easy to tax them away unless your tax rate was very low. Also, different businesses have different models; some are low-margin, high volume, and others are the opposite. A no-deductions regime punishes the low-margin business disproportionately.
Oh, yeah, no deductions for your suits any more than for mine, although you might be able to structure an LLC to own your suits for you and lease them to you, or some such. You'd have to talk to a real tax lawyer about that one.
"The big problem with your flat tax proposal is not the rate, but the definition of taxable income.
I think that is a cop out. Income is income. Dividends, Salary, Tips, etc. is income. Capital gains are not.
On the contrary, why should capital gains be treated any differently than any other source of monetary gain? We tax lottery winnings as income, why not capital gains?
"Also, contrary to an earlier assertion, most inherited wealth was never taxed. Instead it reflrects long term asset appreciation. Since the assets were acquired cheaply decades ago and never sold, the bulk of the wealth was never taxed."
The income that started the asset that appreciated was taxed as it should be. No tax on capital gains... its not income.
For the 4th+ generation trustfund recipients, if the original income was earned before 1916, it was never taxed.
I can see why the rich might like paying no taxes, but I think the enlightened ones realize that this is contraindicated for their longterm survival.
So much of the appeal with the proposed new "fair tax" system was its simplicity! I feel like we need an accountant in here to moderate some of the questions brought up (capital gains, tips, taxes on corporations etc...). I think that it goes without saying that we all have a lot of questions when it comes to the new system.
The first and foremost is whether or not we can apply such a model and more importantly is it really a non-regressive fair system?
These topics were featured on TheIssue.com recently along with different perspectives on Huckabee's plan.
Feel free to take a look and comment (http://theissue.com/issue/7294.html)
Cheers,
Robert
The Issue | www.TheIssue.com
Um, Robert, it looks like TheIssue is talking about the FLAT Tax, not the FAIR Tax. Big hellova difference.
On the contrary, why should capital gains be treated any differently than any other source of monetary gain? We tax lottery winnings as income, why not capital gains?
You already paid taxes on the income that generated capital gains. I want no part of social engineering through taxes but I think that a country full of people making capital gains tax free sounds pretty damn good to me.
For the 4th+ generation trustfund recipients, if the original income was earned before 1916, it was never taxed.
Is there really that many of these people out there? I'm a west coaster so I've never met a 4th generation rich person and barely any second generation. Most rich people I know are rich in the last 20 years.
Back to what is in or out of "income"... how do the countries that have a flat tax handle this? Not that I really expect anyone to be well-versed in the tax policies of the eastern European countries (and Russia) but thought I'd throw it out there.
Back to what is in or out of "income"... how do the countries that have a flat tax handle this?
No idea.
I am amazed that there are so many people that purport to be educated professionals that have not made the slightest effort to find out what the hell they are arguing about. Try going to Amazon and buying The Fair Tax Book: Saying Goodbye to the Income Tax and the IRS: Books or if you still have questions try FairTax: The Truth: Answering the Critics or if you're too cheap for that, check your local library.
One reason I can tell that no one has read the proposal is because no one has mentioned the concept of "embedded taxes". That is the portion of the price you pay for everything that consists of the income taxes, payroll taxes, corporate taxes, capital gains taxes and every other tax that has sprung from the brows of the lobbyists that hire the politicians to impose them on the rest of us.
If you read the book you might find out that it was not a politician or a talk show host but an economist, Dr. Dale Jorgenson, at the time Chairman of the Harvard Economics Department, that figured that "embedded taxes" make up approximately 22% of the price of everything we buy. That is products and services.
I'm a Fredhead myself and can't see myself supporting Huck, even with his championing of the Fairtax. But if we're going to argue about something, let's at least argue about actual proposals instead of strawmen constructed to show how much smarter we are than everyone else.
I'll admit that if you're in financial services, you probably won't like the Fairtax. Most of the financial services are built around how to avoid paying income or estate taxes. If those taxes go away, then you might have find different work.
But I'm pretty sure that most of those people would be able to find some other way to game the system. It's in our nature
Rob Lyman is right. A certain amount of complexity is inevitable in the tax code. We could eliminate deductibles for all but the self-employed, but the result might be a lot more people with employer-leased cars and laptops they have to keep track of and request authorization to upgrade, which just shuffles the complexity of life around in a different direction.
As for not taxing capital gains: it just pushes investment out of defined benefits which yield dividends and into stocks, commodities and real estate. There is no net economic benefit to having people put more of their money directly into stocks, commodities or real estate and less into bonds, deposits and CDs (where the money is then used to fund investment by professionals, rather than amateurs).
There is no particular moral reason why capital gains "should" not be taxed, any more than wages or spending "should" not be taxed. Ideally, nothing should be taxed, and we should live in an anarchist utopia. But the fact is we have to fund government somehow. Any form of taxation creates funny incentives of different kinds: taxing consumption is regressive; taxing income discourages work; taxing dividends and capital gains discourages saving. The best way to fund government is through a mix of income (including dividends and capital gains) and consumption taxes. This frustrates people of a certain narrow, simplistic bent of thinking -- the kinds of people who tend to become libertarians, in fact. But life is irreducibly complex.
I found this comment on www.lcurve.org regarding economic issues. I hope people find this as educational as I do!
Quoting from a recently-published book by political philosopher David Schweickart,
If we divided the income of the US into thirds, we find that the top ten percent of the population gets a third, the next thirty percent gets another third, and the bottom sixty percent get the last third. If we divide the wealth of the US into thirds, we find that the top one percent own a third, the next nine percent own another third, and the bottom ninety percent claim the rest. (Actually, these percentages, true a decade ago, are now out of date. The top one percent are now estimated to own between forty and fifty percent of the nation's wealth, more than the combined wealth of the bottom 95 %.)
There is a growing class of billionaires that collectively holds a substantial fraction of the wealth of the country. [In March 2006 Forbes reported 793 billionaires in the US with combined net worth of $2.6 trillion. In March 2007 Forbes reported 946 billionaires in the US with combined net worth of $3.5 trillion. That is a 1-year increase of 19% in the number of billionaires and an increase of $35% in their net worth during a time of increasing poverty. Severe poverty is at its highest point in three decades.]
I do not have any problem with successful, wealthy, and/or well educated people, nor do I envy them. In fact I have great respect for Mr. Gates Sr., Mr. Buffet, and Dr. Robert Reich.
What I have a problem with is the attitudes in this country about the poor and the wealthy. Since President Ronald Reagan, people seem to have lost respect for poor and unfortunate people and detest giving a helping hand and the wealthy and businesses can do no wrong. That “kick them while they are down” attitude degrades our morals, principles, and government policies. The biggest injustice is the tax system. Mr. Gates Sr. has talked about estate taxes. Mr. Buffet has talked about the percent of tax paid. Dr. Reich has talked about the widening inequality of income and wealth and other things.
While I have nothing against billionaires, I do wish Republicans would let them pay their own taxes. When a poor person is taxed on 50 % of his net worth and a wealthy person is taxed on much less than 1 % on his net worth and a business is not taxed, that is not fair! The supporters of the consumption tax are trying to convince you to vote for the well being of the wealthy and businesses.
Let’s level the playing field for business by taxing every business out there the same. The only fair way to do that is a net worth tax. Should a single mother of 3 making minimum wage be forced to pay for part of a company jet? What are your morals? What is fair to you?
What should taxes be based on? Would you call someone making $50,000 a millionaire? If he has a net worth of $10 million, would you call him a millionaire? If someone has a net worth of $1,000.00, should he be required to pay $1 million in taxes? Should taxes be based on what someone buys?
By definition the term millionaire is based on net worth, not income. Therefore, if someone has a net worth of $1 million or more, yet only has an income of $50,000 per annum he is still a millionaire.
Income is not a measure of being rich, net worth is. Taxes should be based on ones ability to pay, not what he makes or spends.
When a poor person is taxed on 50 % of his net worth and a wealthy person is taxed on much less than 1 % on his net worth and a business is not taxed, that is not fair! The supporters of the consumption tax are trying to convince you to vote for the well being of the wealthy and businesses.
Wealthy people can use their influence single-mindedly and very effectively. A single billionaire can get the undivided attention of any politician he wants, any time he wants. If he doesn't get what he wants he can, in fact, "fight city hall," the statehouse, and even the federal government. Poorer people must pool their limited individual power and organize to have any effect at all. This is a very difficult thing to manage, in practice.
There are two classes in this country. One class derives concentrated power from its concentrated wealth. The other class has power only in numbers. That power is effective only to the extent that it can be mobilized through organization.
We live in representative democratic society. That means that “we the people” vote for people to represent us to conduct the business of government for the people. Businesses can’t vote and the wealthy that control the businesses are too small in number to elect the representatives. So what do they do? They have money to influence government to their advantage legally. The tobacco companies spent billions to influence public opinion and therefore government regulations to make even more money and kill people. The oil companies spent billions to fight the fact that burning fossil fuels accelerates global warming. Why? Short term profits. Will they make money? Yes. Will they destroy the planet? Maybe. Will people die? Yes. The examples go on and on. Increasing copyright laws from the original 14 years to 70 +, chemical company clean-ups, strip mining, saving and loan, Enron, and so on.
The point is that wealthy people hire lobbyist, think tanks, government employees, and yes our representatives to persuade people that our representatives are voting in the best interest of people instead of allowing the wealthy to steal from society. The fair tax system is funded by millionaires and companies. The fair tax system benefits the wealthy and companies. Shouldn’t people take a critical look at their claims to see how the tax system will benefit them and society?
Until we come to terms with these issues, phrases such as, "We the people...," and, "of the people, by the people, and for the people," are hollow clichés. Every four years people get to exercise there power to vote for representatives. 2008 is one of those very important years. Please don’t make the same mistakes as the last years.
For FY 2006, the IRS reports collections of 44.7% of Individual Income tax and 13.8% of Corporation income tax for the budget of $2.76 trillion. When employment taxes are included, individuals contribute 60 % to the budget while corporations only pay 28.5%. Income is not a measure of being rich, net worth is. Taxes should be based on ones ability to pay. Individuals have assets of $55 trillion and corporations have over $60 trillion. If corporations were paying their fair share, we would not have a budget deficit of 9%.
The wealthiest 10 % own 80% of all stock and 73% of all individual assets. Shouldn’t the wealthiest 10 % be paying 73 % of the individual income taxes? The wealthiest 1-percent make 25% of all individual income and the wealthiest 0.5 % make more than the lowest 50%. Does anyone really think that the poorest 50 % of taxpayers should or could finance 50% of the income tax budget? Our present tax system is not doing a good job.
The consumption tax will increase the tax on people about 28.5 %.
Instead of individuals paying 60 % of taxes, they will pay 100% of the budget.
In FY 2006, corporation income tax was 13.8 % of the federal budget of $2.7 trillion and corporate employment taxes were 14.7 %. Under the "Fairtax plan," businesses do not pay taxes.
Corporations enjoy all of the privileges of persons except the vote. They benefit from infrastructure, employee public education, law enforcement and limited liability. If corporations do not pay taxes, their privileges should be revoked. Privileges include copyrights, trademarks, patents, and contracts. Only people should be able to own these items and be responsible for them.
Taxable property is what most of the people have. Intangible property which is not taxable is what the wealthiest people have the most of.
“FairTax” definitions:
Taxable property – any property (including a leasehold of any term or rents for such property), but excluding intangible property and used property.
Intangible property – an asset that is not physical and not real property. It includes copyrights, trademarks, patents, goodwill, financial instruments, securities, commercial paper, debts, notes, and bonds.
Taxable property or services purchased from a seller for a business purpose in an active trade or business, or for export from the United States for use or consumption outside the United States are not taxed.
Purchases by consumers are taxed.
Investments (property purchased exclusively for purposes of appreciation of income or the production of income) are not taxed.
Used property – defined as property on which the federal sales tax has been collected already, and property that was held for other than a business purpose on December 31, 2008 (the day before the sales tax became effective). The term "used" relates to whether or not the sales tax has been paid previously, and not just to whether or not the item has been sold previously. It appears that almost everything will be taxed for the first few years.
Why don’t we just tax intangible property and forget about the rebate?
The consumption tax is not fair.
When a company has a dispute with a customer, they may find themselves in a court that only the customer has funded and to add insult to injury, the customer has to pay his lawyer 23 % more than the company does.
Will the IRS really be gone? The IRS is uniquely qualified to administer the Fair Tax with people, computers, and facilities in every state and major city.
The FairTax Act will phase out appropriations for the Internal Revenue Service and then spend billions recreating bureaus to administer the Fair Tax.
The fair Tax Act will pay retailers to collect taxes and keep records for six years and pay states to collect from retailers. An administering state enters into a cooperative agreement with the U.S. Treasury Department governing the administration of the FairTax by such state.
The Social Security Administration sends out the monthly rebates.
The Secretary of the Treasury is given the authority to promulgate regulations, to provide guidelines, to assist states in administering the FairTax, to provide for uniformity in the administration of the tax, and to provide guidance to the general public.
The Secretary of the Treasury is required to establish an Office of Revenue Allocation to arbitrate any disputes between states regarding the destination of sales for purposes of allocating sales tax revenue among the states.
The Secretary of the Treasury and each state sales tax administering authority may employ persons as necessary for the administration of the FairTax and may delegate to employees the authority to conduct hearings, prescribe rules and regulations, and perform other such duties.
Following due process of law, the tax administering authority can seize property, garnish wages, and file liens to collect FairTax amounts due. Each sales tax administering authority must establish, maintain, and adequately staff an effective, independent Problem Resolution Office to protect citizens from abusive administration.
The sales tax administering authority must establish and maintain an appeals process that provides a full and fair hearing of any dispute regarding tax liability.
The Treasury Department may use FairTax data in preparing economic or financial forecasts, projections, analyses, or estimates.
The fair Tax Act establishes an Excise Tax Bureau within the Treasury Department to administer those excise taxes not administered by the Bureau of Alcohol, Tobacco and Firearms.
It also establishes a Sales Tax Bureau to administer the national sales tax in those states where the federal government directly administers the tax and to discharge other federal duties and powers relating to the FairTax.
Does a rose by any other name still smell as sweet?
Reasons for a Net Worth Tax System
America should adopt a tax system based on net worth for the following reasons.
1. The net worth tax system has the broadest base of any tax system. The net worth of this country is larger than the income system, about $9 trillion, and the consumption system, less than the gross domestic product, (GDP) about $14 trillion. The individual assets of $55 trillion and business assets of about $60 trillion, $115 trillion, is more than 8 times the GDP of $14 trillion, a stack $100 bills that go around the moon and back: twice. Three percent of which is over $3 trillion. More than what our national budget is.
2. Income is not a measure of being rich, net worth is. George Will has said that the wealthiest 1-percent of households have more assets than the lowest 90%, $16 trillion. (The top one percent are now estimated to own between forty and fifty percent of the nation's wealth, more than the combined wealth of the bottom 95 %.) Since the total individual assets are $55 trillion. The wealthiest 10% own about 73% of the net worth in the USA. The biggest 1-percent of corporations own 80 % of the business net worth.
3. Taxes should be based on ones ability to pay. A tax on net worth is the fairest tax to all. Net Worth is the measure of ones ability to pay.
4. Taxes on net worth have the lowest percentage. America’s budget is about $3 trillion. A consumption system requires a sales tax of over 21%. A net worth tax would be less than 3%.
5. A tax on net worth is the most versatile. Besides a flat tax of 3% for individuals and businesses, there are other possibilities. Some people say we have double taxation. We could tax only people at 6% or only businesses at 6%. Since businesses can’t vote and they pass there cost on to their customer, this is the best way to go. Next is the progressive path. The first $1 million could be tax-free and increase by 0.1 % for each $1 million up to 5% after $50 million. The other methods could also start at above $1 million or higher.
6. A tax on net worth is the simplest to file. Take what you own minus what you owe. Our present tax system is 63,000 pages of loopholes. Example: a person leases a car. The lessee does not own the car, so no tax. The leasing company owns the $25,000 car, but has a $10,000 loan. The company is taxed on $15,000. ($25,000 minus $10,000) The loan entity has $10,000 of assets so it pays tax on $10,000.
7. A tax on net worth is the easiest to enforce. Since this is a property rights country, all assets are traceable. Taxing only the most prosperous 10 % of businesses and people is the most efficient tax system.
8. Like the consumption tax, all of our present taxes could be replaced, individual income tax, corporation income tax, employment taxes, gift tax, and estate tax. Plus the excise tax.
9. Guarantees funding for all budget items like social security and Medicare by eliminating use taxes. User fees or tolls are another way for the wealthy and businesses to avoid paying taxes. Budget items come out of general funds.
10. A tax on net worth promotes transparency. When a company shows an annual report with a book value of $1 billion and only $10 million in taxes, they aren’t paying their full taxes.
A tax on net worth promotes free trade. Money, inventory, buildings, etc. are all assets so everyone can move assets around for the best effect.
11. Eliminate inflation. Dr. Milton Friedman said to end inflation, stop printing money. By increasing the tax rate 1%, the national debt of $9 trillion could be paid off in 10 years.
12. We start collecting 100 percent of our earnings in every paycheck. We all get virtual raises, since payroll taxes are no longer siphoned from our checks.
13. Reducing taxes on the poorest 90% will raise revenue. When people have more money to spend, they buy more goods, which mean more profit for businesses and the wealthiest 10%. Money flows up, water trickles down.
14. A tax on net worth promotes jobs. Employees cost companies less since the employment taxes are repealed and therefore employees become more competitive in the global market.
15. A progressive tax on net worth levels the playing field. Small companies that create the most jobs become more competitive with large companies.
16. A tax on net worth removes some incentive to move plants overseas. Taxes are based on assets no matter where they are located. What you own minus what you owe.
If your house is 'used', you pay zero tax on it. If it's 'new' under the proposed tax system, much of the embedded tax cost in the upstream supply chain will not be present- meaning it will cost your builders less to build it than it does today.
If it sounds like something for nothing, that's because we're collectively unaware of how expensive the current system is for us.
The net worth tax: because the American savings rate is far too high.
Gruumpy realist:
Good call on the Flat tax vs Fair tax comment. Though you are right that they are very different proposals, I still think that in essence they are the same. Both offer a consistent proportional tax and both have their respective theoectical claims to exempt the poor. Flat tax offers exemptions and the Fair tax has its prebates.
I still think that both models attempt to spread the tax burden from the "rich" more towards everyone else. Maybe your proposal for the implimentation of a capital tax is not such a bad idea but even that would burden the midle class and the poor that finally manage to make that house purchase.
Maybe you might want to elaborate a little bit more.
Robert
The Issue | www.TheIssue.com
A consumption tax could garner more support if services/labor were taxed at a lower rate than new products. More US dollars would remain in domestic circulation putting Americans to work in service and repair, and less would be sent overseas to purchase cheap consumer goods. Such a plan would appeal to the labor unions, the environmentalists and the economists.
The FairTax would untax US goods that are exported. Currently various corporate taxes are embedded in their price, to the tune of 15-20%. Concurrently, FairTax would be applied to imported goods. This levels the playing field for US goods on the world market, since currently European goods that are exported get a rebate on their VAT. Additionally, without taxation of profits or capital and the vastly reduced tax compliance costs, businesses will flock back to the US. Just reducing the drain on the economy from tax compliance and tax concerns, estimated between $200 to $500 billion per year, is a significant boost.
I found this comment on http://robertreich.blogspot.com/ regarding economic issues.
MONDAY, JANUARY 28, 2008
The Real Recession Problem: Consumers Are at the End of Their Ropes
Perhaps the silliest part of an already silly stimulus bill is a provision giving corporations big tax deductions this year on the costs of new machinery, instead of spreading those deductions over several years, as is normally the case. The idea is to get businesses to invest in more machinery, which will stimulate the economy.
But accelerated depreciation, as it’s called, doesn’t work. Almost the same tax break was enacted in 2002 and studies show just about no increase in business investment as a result. Why? Because companies won’t invest in more machines when demand is dropping for the stuff the machines make. And right now, demand is dropping for just about everything.
This tax break exemplifies the illogic of what’s called supply-side economics. If you reduce the cost of investing, so the thinking goes, you’ll get more investment. What’s left out is the demand side of the equation. Without consumers who want to buy a product, there’s no point in making it, regardless of how many tax breaks go into it.
Which gets us to the real problem. Most consumers are at the end of their ropes and can’t buy more. Real incomes are no higher than they were in 2000, while food and energy and health care costs are all rising faster than inflation. And home values are dropping, which means an end to home equity loans and refinancing.
Most of what’s being earned in America is going to the richest 5 percent, but the rich devote a smaller percent of their earnings to buying things than the rest of us because, after all, they’re rich -- which means they already have most of what they want. Instead of buying, the rich invest most of their earnings wherever around the world they can get the highest return.
Add all this together and there’s just not enough consumer demand out there to keep the American economy going. We’re finally reaping the whirlwind of widening inequality and ever more concentrated wealth. Supply-siders who want to cut taxes on corporations and the rich just don’t get it. Neither does most of official Washington.
Megan, it looks like you are very knowledgeable but you cannot get through to people by throwing out fact after fact or opinion after opinion. It is FACT then...What I mean by this is....or FACT then For instance, otherwise you are going to be shooting steam out of your ears for years.
Yes 23% of 1 million is less than 23% of 25,000. You used the word 'utility' You could elaborate more by saying. A person can survive on $770,000 with personal expenses versus a person survival on $19,250.
In this article the only people that will get what you are saying are the people that you are preaching to the choir to. It looks like there is more here that I want to read or know about, but your statements are empty.